Farmers National Banc(FMNB) - 2019 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements of Farmers National Banc Corp. for the period ending September 30, 2019, detailing financial position, performance, and cash flows, along with significant accounting policies Consolidated Balance Sheets The Consolidated Balance Sheet shows total assets grew to $2.43 billion as of September 30, 2019, from $2.33 billion at year-end 2018, primarily driven by an increase in net loans and deposits, while total stockholders' equity also increased to $293.2 million from $262.3 million over the same period Consolidated Balance Sheet Highlights (USD in thousands) | Account | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $2,433,210 | $2,328,864 | | Net Loans | $1,769,864 | $1,722,248 | | Securities Available for Sale | $423,193 | $402,190 | | Total Deposits | $2,040,652 | $1,799,720 | | Total Liabilities | $2,139,987 | $2,066,544 | | Total Stockholders' Equity | $293,223 | $262,320 | Consolidated Statements of Income For the third quarter of 2019, net income was $9.15 million, an increase from $8.08 million in Q3 2018, while for the nine months ended September 30, 2019, net income rose to $26.09 million from $23.88 million year-over-year, supported by higher net interest income and a 14.9% increase in noninterest income for the quarter Income Statement Summary (USD in thousands, except per share data) | Metric | Q3 2019 | Q3 2018 | 9 Months 2019 | 9 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $20,757 | $19,919 | $61,213 | $58,427 | | Provision for Loan Losses | $550 | $950 | $1,850 | $2,475 | | Total Noninterest Income | $7,441 | $6,478 | $20,955 | $18,794 | | Total Noninterest Expenses | $16,423 | $16,180 | $49,104 | $46,734 | | Net Income | $9,154 | $8,084 | $26,085 | $23,883 | | EPS - Fully Diluted | $0.33 | $0.29 | $0.94 | $0.85 | Consolidated Statements of Comprehensive Income Total comprehensive income for Q3 2019 was $12.27 million, a significant increase from $4.21 million in Q3 2018, driven by a positive swing in other comprehensive income, which recorded a $3.12 million gain (net of tax) from unrealized gains on securities, compared to a $3.87 million loss in the prior-year quarter Comprehensive Income Summary (USD in thousands) | Metric | Q3 2019 | Q3 2018 | 9 Months 2019 | 9 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $9,154 | $8,084 | $26,085 | $23,883 | | Other Comprehensive Income (Loss), Net of Tax | $3,117 | $(3,872) | $15,024 | $(11,098) | | Total Comprehensive Income | $12,271 | $4,212 | $41,109 | $12,785 | Consolidated Statement of Stockholders' Equity Stockholders' equity increased to $293.2 million at September 30, 2019, from $248.8 million a year prior, primarily due to $26.1 million in net income and a $15.0 million increase in other comprehensive income, partially offset by $7.8 million in dividends declared and $2.8 million in share repurchases during the first nine months of 2019 - Dividends declared for the nine months ended Sep 30, 2019 were $0.28 per share, compared to $0.22 per share for the same period in 2018[24] - The company repurchased 201,169 shares for $2.84 million in the first nine months of 2019, with no repurchases in the same period of 2018[24] Consolidated Statements of Cash Flows For the nine months ended September 30, 2019, cash and cash equivalents increased by $27.7 million, with net cash from operating activities at $26.1 million, investing activities using $54.2 million primarily for net loan originations, and financing activities providing $55.8 million driven by a $240.9 million net increase in deposits largely offset by a $213.8 million net decrease in short-term borrowings Cash Flow Summary (Nine Months Ended Sep 30, USD in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $26,142 | $26,836 | | Net Cash from Investing Activities | $(54,207) | $(130,389) | | Net Cash from Financing Activities | $55,814 | $121,574 | | Net Change in Cash and Cash Equivalents | $27,749 | $18,021 | Notes to Unaudited Consolidated Financial Statements The notes detail the company's accounting policies, recent and pending accounting standard adoptions, business combinations, and provide granular information on financial instruments, including disclosures on the pending merger with Maple Leaf Financial, the composition of securities and loan portfolios, allowance for loan losses, fair value measurements, and regulatory capital adequacy - On July 1, 2019, the Company merged its Retirement Consulting segment into the Trust segment for reporting purposes to increase efficiencies, reducing reportable segments from three to two (Bank and Trust)[31][34] - The Company adopted ASU 2016-02 (Leases) on January 1, 2019, resulting in the capitalization of a $3.6 million right-to-use asset and a corresponding lease liability[43] - The Company is preparing to adopt ASU 2016-13 (CECL) on January 1, 2020, and estimates it will increase the allowance for loan losses by 10% to 20%[42] - On August 30, 2019, the Company entered into an agreement to merge with Maple Leaf Financial, Inc., a transaction expected to close in Q1 2020, with Maple Leaf having total assets of $277.8 million as of June 30, 2019[48][50] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial results for the third quarter and first nine months of 2019, highlighting strong performance with net income of $9.2 million for the quarter and $26.1 million for the nine-month period, driven by loan growth, a 14.9% quarterly increase in noninterest income, and disciplined expense management, leading to an improved efficiency ratio, alongside robust asset quality and significant deposit growth Key Performance Ratios (annualized) | Metric | Q3 2019 (%) | Q3 2018 (%) | 9 Months 2019 (%) | 9 Months 2018 (%) | | :--- | :--- | :--- | :--- | :--- | | Return on Average Assets | 1.51 | 1.42 | 1.47 | 1.45 | | Return on Average Equity | 12.49 | 12.80 | 12.52 | 13.00 | | Net Interest Margin (tax-equivalent) | 3.79 | 3.86 | 3.81 | 3.90 | | Efficiency Ratio (tax-equivalent) | 55.90 | 58.70 | 57.32 | 58.00 | - Gross loans increased by $48.3 million since year-end 2018, an annualized growth rate of 3.7%, driven by commercial, real estate, and agricultural lending[189][224] - Noninterest income for Q3 2019 increased 14.9% year-over-year, led by a 42% increase in gains on sale of mortgage loans and a 20% growth in insurance agency commissions[194][211] - Asset quality remains strong, with nonperforming loans as a percentage of total loans decreasing to 0.38% at Sep 30, 2019, from 0.55% a year prior, and the allowance for loan losses to nonperforming loans increased to 211.31%[227][230] - Total deposits increased by $240.9 million in the first nine months of 2019, primarily due to growth in public funds and an $87.0 million increase in brokered time deposits[232] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with simulation analysis showing the balance sheet is slightly asset-sensitive, projecting a sudden +300 basis point rate increase to increase Net Interest Income (NII) by 5.9% and Net Present Value of Equity (NPVE) by 43.3%, while a -100 basis point decrease is projected to reduce NII by 4.4% and NPVE by 30.0%, with the NPVE change in the -100 bps scenario exceeding internal policy limits Interest Rate Sensitivity Analysis (as of Sep 30, 2019, % Change) | Rate Shock (bps) | Change in Net Interest Income | Change in Net Present Value of Equity | | :--- | :--- | :--- | | +300 | +5.9 | +43.3 | | +200 | +4.1 | +35.5 | | +100 | +2.2 | +21.7 | | -100 | -4.4 | -30.0 | - The change in the net present value of equity exceeded the internal policy guideline in the -100 basis point shock scenario, attributed to the negative impact on the fair value of low-bearing core deposits, which cannot be fully repriced downwards[252] Controls and Procedures The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2019, with no material changes to internal controls over financial reporting during the third quarter - The company's principal executive and financial officers have certified that disclosure controls and procedures are effective[253] PART II - OTHER INFORMATION Legal Proceedings The company is involved in ordinary course legal proceedings, accruing a $505 thousand charge in Q2 2019 for a pending settlement, which is expected to be fully recovered via insurance coverage - The Company accrued a charge of $505 thousand relating to a pending settlement of a legal contingency, which it expects to recover via insurance[178][254] Risk Factors There have been no material changes to the company's risk factors from those disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2018 - No material changes to risk factors were reported since the last Annual Report on Form 10-K[255] Unregistered Sales of Equity Securities and Use of Proceeds On July 30, 2019, the Board of Directors authorized a new share repurchase program for up to 1,500,000 shares, superseding a prior program, under which the company purchased 100,697 shares at an average price of $14.44 per share during the third quarter of 2019 before it was superseded, with no shares purchased under the new program during the quarter - A new share repurchase program for up to 1,500,000 shares was authorized on July 30, 2019[257] Share Repurchase Activity (Q3 2019) | Period | Total Shares Purchased | Average Price Paid per Share (USD) | | :--- | :--- | :--- | | July 1-30 | 100,697 | $14.44 | | August 1-31 | 0 | $0 | | September 1-30 | 0 | $0 | Defaults Upon Senior Securities Not applicable Mine Safety Disclosures Not applicable Other Information Not applicable Exhibits This section lists the exhibits filed with the report, including the Agreement and Plan of Merger with Maple Leaf Financial, the company's Articles of Incorporation, CEO/CFO certifications, and iXBRL formatted financial statements - Exhibits filed include the merger agreement with Maple Leaf Financial, Inc., corporate governance documents, and required officer certifications[263]